Credit Card Antitrust Suit

The Antitrust Division of the Department of Justice has recently continued to enforce long-neglected antitrust laws with a lawsuit against Visa and MasterCard, the credit card duopoly. Their stranglehold on the credit card market is nothing new, and is part of a broader concentration of financial power into a few megacorporations, accompanied by a decrease in public protections for consumers (called “deregulation”). Credit card companies, such as Visa and MasterCard, are not independent corporations with individual owners or publicly traded stock. They are “membership corporations,” whose members are banks that sit on the board of directors, choose the management, and serve on policy-making committees. The card companies issue cards to consumers and businesses, provide merchants with access to credit-processing networks, and allow banks to issue credit cards with access to their network.

Before 1970, different banks controlled Visa and MasterCard. When one Visa member tried to join MasterCard, Visa adopted a bylaw forbidding this. However, Visa and MasterCard amended their bylaws a few years later to allow their member banks to join each other, but not other credit networks such as American Express or Discover. “Duality,” as this system of collusion is called in the credit industry, was a boon to big banks: as stated in the DOJ complaint, “since 1975, virtually all significant card-issuing banks have become owners of both Visa and MasterCard.” Today, Visa and MasterCard process 75% of the dollar volume of credit card transactions, and issue 86% of cards in use. Consumers have consequently suffered from artificially high interest rates and a lack of innovation. The DOJ complaint www.usdoj.gov/atr/cases/f1900/1973.htm documents that Visa and MasterCard have systematically avoided competing with one another and have frequently cooperated, to the detriment of other credit card companies. Many actions proposed by the (human) managers of each company to increase their market share or performance have been vetoed by the board of (bank) directors, concerned that competition would hurt bank profits. For instance, smart cards and stored-value cards are yet to be introduced in the United States (although they have been elsewhere), and the introduction of a secure Internet transaction system by Visa and Microsoft was delayed because MasterCard would have “been forced to respond competitively” and work with other software companies.

The squeezing of every last penny from the poor and working classes by credit card companies is well documented in Richard Alexander’s recent book, Merchants of Misery. It outlines in gory detail the way cash-checkers, pawn shops, and others who feed on low-income Americans are really fronts for “respectable” financial behemoths like Bank of America and Citibank. The government has diligently helped gouge the citizenry. One of the best examples of this is Alabama lending laws. Among other travesties, pawn shops can charge 25% per month interest on small loans, and so can “pawn-your-title” operations that accept car titles as collateral. These loans can be automatically renewed each month, leading to an effective annual interest rate of 1450%!!! Einstein called compound interest the 8th wonder of the world; perhaps Moses would have found it a nice 11th plague.

A rarely-discussed turning point in personal finance is the 1978 Marquette Supreme Court ruling, which held that a lender may charge the highest rate allowed by its home state, regardless of limits imposed in the borrower’s state. US states had always had usury laws controlling in terest rates until the Marquette ruling, after which they were quickly liberalized, repealed, or rendered irrelevant. South Dakota and the mother of all corporate prostitutes, Delaware, quickly relaxed their usury laws. Citibank quickly opened up a processing center in South Dakota, and Visa and MasterCard are both chartered in Delaware. This and other outcomes of interest-rate deregulation are outlined in an excellent FDIC report, www.fdic.gov/bank/analytical/bank/bt_9805.html. A few stunning effects are: 1. since Marquette, the personal bankruptcy filing rate has more than quadrupled, and 2. Consumer debt now totals $6 TRILLION, about 2/3 of GDP. Rest assured Congress has recently addressed the bankruptcy explosion by passing the Bankruptcy Reform Act of 1999, opposed by the Consumer Union, US PIRG, the National Consumer Law Center, and others. The law allows more of an individual’s assets (such as their home) to be included in credit payback settlements and inhibits debtors from obtaining legal counsel, while failing to hold lenders accountable for putting huge pressure on people to borrow and for making risky loans.

This protection is not the first special exemption creditors have gotten from the “free market.” One of the most basic principles of investment is that one receives higher rates of return by taking bigger risks. Among other things, risk means a chance the borrower will default, and the lender will loose his or her investment. However, as we have seen in the 1994 Mexican peso bailout and the East Asian bailouts, the Federal Reserve, IMF and other public institutions believe that poor, developing-world peoples should suffer when their governments and banks default on loans, and that Western lenders should have their loans paid back by Western taxpayers via IMF bailouts.

The trend in credit is part of a much broader consolidation of the financial industry. Banks are merging at a record pace. The most disturbing one is the Citibank/Travelers Group merger, which gave birth to Citigroup. Citibank is a bank, and Travelers’ Group an insurance company; their union was explicitly banned at the time by the Glass-Steagall Act. This landmark New-Deal legislation was enacted to address some minor economic effects of companies being involved in commercial banking, insurance, and investment (there was a mild economic downturn in the late 1920s, which may still be discussed by certain leftist history teachers). This law forbade any company from operating in more than one field, period. So clear is this legislation that it has basically survived the best attempts of financial wizards to pull rabbits through legal loopholes.

Apparently we have forgotten the lessons of the past and are consciously condemning ourselves to repeat them: Congress recently repealed Glass-Steagall. Many concerned citizens helped educate Congress as to the public need for this salutary action, especially given the duress and foreign competition that confronted American finance in the 1990s, such as the East Asian financial meltdown. These grassroots efforts were primarily conducted through the noble auspices of Citibank and Travelers’ Group, in one of the biggest legislative purchases in history. They have publicly explained their appalling rationale. To buy time (needed to buy votes), Travelers proposed to acquire Citibank, so that the merger would be regulated by the Federal Reserve. The Fed can issue a five-year waiver on Glass-Steagall restrictions while it reviews a merger, during which time Citibank and Travelers could start to implement their illegal marriage. They figured they would be able to purchase a repeal of Glass-Steagall during this time. They were right. Killing two birds with one stone, Citibank has also avoided an irritating Justice Department probe into how it helped the laundering of $200 million in drug money, by Raúl Salinas, a k a Mr. Ten Percent, brother of Carlos Salinas, former president of Mexico. The dynamic duo of the CIA and drug lords is now an unholy trifecta.

This should terrify every person in this country (except the sanctified corporate “persons” emancipated from public control by the 14th amendment) who believes in democracy. Here we have a documented, blatant case of a powerful interest purchasing an enormous change in federal legislation for its own benefit. As the Republican Senator John Sherman said in 1890 when arguing for the Sherman Antitrust Act, “if we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life.” Robert Reich points out that besides economic concerns such as reduced competition and harm to workers, the blizzard of megamergers raises serious political concerns: will these new entities unduly influence public affairs? He, as well as we, believes that the threats to democracy are drastic. Yet they are consistently overlooked in our public discourse. Why? Could this be related to corporate control of the media, and thereby of public information and discussion? Might the rivers of soft money flowing into the Capitol Cesspool have anything to do with it?

There are actions individuals can take to fight this trend. You can contact politicians and let them know that you are aware of and upset about what is happening. You can also obtain a card from a smaller credit card company, and probably be pleasantly surprised by some of the features they offer. Also, you can use cash whenever possible: besides the interest you pay on credit card purchases, businesses pay a fee of at least 2-3% on every credit card transaction, thereby transferring more wealth to the wealthy. The ubiquity of credit has led most merchants to charge the same price for cash and credit transactions, thereby hiding this cost. There are still numerous small community banks and credit unions (many of which offer more attractive rates for consumers) one can use, thereby keeping more money in the local economy rather than on Wall Street or in some African sweatshop.

Most importantly, one can inform others about what is happening and urge them to take action; the New York Times doesn’t seem to be in any rush to do so.